Gross Margin, Gross Profit and the Price Elasticity of Demand

Abstract

Low gross margin can predict failure. High gross margin increases the odds of superior profits. A company’s gross margin is the weighted average gross margin of its products. The easiest way to change a company’s gross margin is to focus on products with a low, zero or negative gross margin. The temptation might be to simply discontinue these products. A better alternative is to consider whether a product can be repriced to improve gross margin and gross profit.

Raising price reduces demand based on a product’s price elasticity. Academic articles on price elasticity tend to employ calculus and statistics that are beyond the skill of the individuals who actually make pricing decisions. The contribution of this article it is to provide a clear, simple means of identifying a price point that maximizes product gross profit considering unit cost and the price elasticity of demand.